When we first met, about four years ago in America, we both had certain prejudices. One of us thought that everyone who worked in Silicon Valley had to be under 40, wear trainers and be better at forming relationships with computers than humans. The other thought that everyone who was a Conservative had to be over 40, wear only suits and be socially illiberal. We soon got to know each other and discovered that while we were both wrong about the stereotypes, we did share one bias: a passionate commitment to innovation.

Innovation drives the modern world. It determines the success of companies, and in this century it will also determine the success of countries. For decades, we've been familiar with the concepts of trade and budget deficits. But today, developed economies also need to worry about the innovation deficit.

We can't just assume we'll earn a living doing the same old things. In the 20th century, the shape of success didn't change much: companies grew slowly and dominated markets for many years. Of course, we still want the many household names in our corporate world to succeed. But recently, that pattern has been blown apart by young, fast-growing and highly innovative firms. It's astonishing to think that between 1980 and 2005, nearly all net job creation in the US occurred in companies under five years old. It's the same picture in Britain, where 6 per cent of high-growth firms generated over half of net employment growth between 2005 and 2008.

Evidence shows that the most innovative are growing twice as fast as those that fail to innovate. This trend looks set to continue: a report published by Google last week showed that the internet's contribution to the UK economy is likely to grow at 10 per cent per annum in the years ahead. We simply cannot afford to be modern-day Luddites, resisting change in our private or public sectors. Innovation can upset the established order, but it is to be welcomed, not feared.

If jobs are going to come from innovation, it's a big problem if the innovation is happening somewhere else. That's why the Prime Minister has emphasised the importance of building a new economic dynamism in this country, saying we back the big businesses of tomorrow as well as the big businesses of today.

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The question is, how? Here we share another bias: recognising that unleashing innovation means moving away from a centralised, top-down model, to the bottom-up, ideas-come-from-anywhere approach fuelled by the internet. The web has put powerful tools and information into everyone's hands. The Government's job should be to create the right ecosystem for ideas and firms to flourish, and to make it easier for businesses to start up, employ people, grow and thrive.

This means rules that encourage competition and innovation. It means investing in science and research – particularly in the environmentally friendly industries of the future. And it means information and telecommunications networks that are the best they can be.

The Government's recent Spending Review put an emphasis on creating the conditions for long-term economic success. But there is more to do. Controlled immigration and economic growth are not incompatible. They go hand in hand. Government research shows that the current system is failing to bring entrepreneurs into Britain. To genuinely attract the best ideas and the brightest people, while bringing net immigration down, the Prime Minister is today announcing new Entrepreneur Visas. They will help those with great business propositions to come to Britain to turn their innovations into jobs and economic success. To make it easier for innovation to flourish, the Government is also launching a review of intellectual property, to make it fit for purpose in the information age.

We see today how the Coalition Government can act as a catalyst, encouraging ground-breaking innovation in the private sector; how government can agitate and convene companies around a clear vision for change. In response, leading technology companies, including Intel, Vodafone, Cisco and Google, are joining forces with University College London, Barclays and Silicon Valley Bank to help create a technology hub in east London. By supporting the already growing cluster of internet firms around Shoreditch and Old Street, and realising the immense potential of the Olympic Park, we can build an innovation ecosystem that supports job creation and economic growth.

Today, Google will commit to creating an Innovation Hub in the area, providing a creative space for developers, academics and entrepreneurs to work together on next-generation apps and other technology innovations. We can't predict what these new ideas will be – and some will doubtless be messy and disruptive – but we can give them the best possible chance of becoming new businesses, with new jobs.

In the four years since the two of us met, the world has changed dramatically. The next four years, up to the London Olympics and beyond, will bring possibilities that are unimaginable today. But while all around us changes, one thing will remain the same: our common belief that innovation is crucial for economic success.

George Osborne is Chancellor of the Exchequer. Eric Schmidt is chairman and CEO of Google